What Small Business Owners Need to Know About Income Tax Instalments

Transitioning from being a full time employee to small business ownership or self employment means that you need to cultivate self discipline.  You can no longer rely on your employer to take care of business functions that do not relate to your job ,and must take a much more active role in ensuring that you remain on top of your obligations whether it is collecting payments from customers, paying bills or ensuring that you do not run afoul of Revenue Canada.  One of these obligations requires that you calculate and pay the full amount of your income taxes when you file your income tax return, rather than having your employer remit deductions from your paycheck directly. In addition to having to calculate and pay your income tax, once you exceed a certain income threshold, you are also required to pay income tax and sales tax instalments.

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What is an Instalment Payment?

When you are an employee, your employer is responsible for deducting and remitting deductions from your paycheque to the revenue agencies.  Small business owners/freelancers/self employed workers, who are unincorporated such as sole proprietorships, are required to take on this responsibility themselves.  Since unincorporated small businesses are only taxed on the profits of the business which are inconsistent from month to month, it can be difficult to estimate taxes payable even with an excellent accounting system as you still have to estimate all of your other income and deductions that will impact your taxes payable. 

Consequently Revenue Canada requires that you pay “instalments” of taxes payable based on an estimate. An instalment is essentially a down payment towards your taxes.

What are the different types of Instalment Payments?

Unincorporated (sole proprietorships etc.) small business owners are require to make periodic payments towards:

• Income taxes

• GST/HST and QST if applicable

How are instalments calculated?

Income Tax Installments

If your income taxes for the previous year exceeded $3,000 (except in Quebec), then you will generally be required to pay instalments. In Quebec, the amount of taxes paid in the previous year for which instalments would apply is $1,800.

Given that it is very difficult to estimate your income taxes precisely until you actually prepare your tax return, there are three different methods by which you can pay instalments. 

No-calculation option

This option is best if your income, deductions, and credits stay about the same from year to year.

The CRA determines the amount of your instalment payments based on the information from your latest assessed tax return. The amount for the no-calculation option will be indicated on the instalment reminders that the CRA sends you. You can also see these by going to your CRA My Account for Individuals.

Prior-year option

This option is best if you think your current year income, deductions, and credits will be similar to your prior year amount, but significantly different from those in the year prior to last. For example if you think 2024 income taxes will be similar to 2023 but significantly different from 2022.

You would calculate the amount of your instalment payments based on the information from your tax return for the 2023 tax year. You can usually simply take 1/4th of the amount of taxes owing for 2023 and pay them as instalments on the instalment due dates (see below). For example, if you owed $10,000 in income taxes for 2023, you would be required to pay $2,500 per quarter in 2024. 

Current-year option

You would use this method of calculating your instalments if you expect your 2024 income, deductions, and credits to be significantly different from 2023 and 2022.

Using this method, you would calculate your instalment payments based on your estimated current year (2024) .For example, if your average tax rate is 35% in 2023 and you estimate that after expenses you will earn $75,000 in the current year, you can remit $26,250 over four instalments equaling $6,562. 

CRA has a calculation chart for instalment payments for 2024 (PDF) to help you calculate your total instalment amount due.

However, I recommend using a tax calculator to estimate your taxes. You would probably want to do the calculation at least every quarter (note that you always enter your expected annual amount into the calculator) and adjust the instalment amount if necessary.

GST/HST and QST Instalments

GST/HST and QST instalments are due when the amount you paid in the previous year for GST/HST or QST exceeds $3,000.

GST/HST and QST quarterly instalments are then simply calculated at 1/4th of the amount you paid in the previous year (based on your annual filing amounts). So if your GST/HST amount payable for 2023 was $6,000 then your quarterly instalment amount would be $1,500.

You can check out my video tutorial on how to pay GST/QST Instalments via online banking.

What are Instalment Due Dates?

If you are a sole proprietorship/unincorporated business, your instalment due dates are as follows:

• Income tax instalments: March 15th, June 15th, September 15th and December 15th

• GST/HST and QST Instalments: April 30th, July 31st, October 31st and January 31st.

Check out my post for specific 2024 business tax due dates.

What happens if you don’t make instalments?

According to CRA: If you make your payments in full by the 2024 due dates, the CRA will not charge instalment interest or a penalty, unless your estimated instalment amounts are too low.

Revenue Canada charges interest on unpaid instalments at prescribed rates which are currently around 9%.

Revenue Quebec similarly charges interest at the normal published rate as long as Instalment payments exceed 75% of the amount payable.  If your instalment payment is less than 75% of the payment required, interest of 10% per year, capitalized daily, is applicable. 

What else do you need to know about instalments?

• You are not required to pay instalments in your first year of business as there is no history upon which to make the calculation.

• Revenue Canada does not require you to pay instalments if your taxes payable are estimated to be $3,000 or less.  If you live in Quebec, this amount is reduced to $1,800.

• Quebeckers similarly have to pay instalments if estimated taxes payable to Revenue Quebec are $1,800 or less.

• You are only required to make GST/HST and QST instalments if the amount payable for GST/HST and QST for the year each exceeds $3,000.  In this case, payments must be made within one month of the fiscal quarter.

• Both Revenue Canada and Revenue Quebec will send you a notice once they have assessed your prior year tax return informing you of the amount payable along with a remittance slip.  Payment can be made via cheque or online banking. They do not however inform you of the amount payable for GST/HST and QST which you have to calculate on your own.

By remitting instalments on a timely basis you reduce the amount of potential interest costs (which are also not tax deductible to your business) and more importantly reduce the temptation to spend money that you will ultimately have to pay to CRA which can result in costly and unpleasant debt. 

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